Re: Going from residential to commercial. - Posted by Frank Chin
Posted by Frank Chin on October 03, 2003 at 07:27:21:
Jim:
I owned residential property in NYC for many years, and the hot market here created a huge equity.
And my dad owned a small commercial property here in NYC since 1965. The rent now pays for a comfortable retirement.
Having observed both markets over the years, I came to some conclusions:
1- You need much more reserve cash in commercial than residential. Vacancies lasts 6 months or more, and prior tenants may not pay rent for months when business goes bad. You have to be ready to cover the bills, even for NNN leases, as you are ultimately responsible for taxes, and insurance if the tenant can’t pay (and the building burns) etc.
My dad had some commercial tenant turnover thru the years, and the average vacancy between tenancies had been 6 months to one year. For my residential apartments, I would one guy moving out in the morning, and someone moving in that evening.
2- There are risks both in large spaces, as well as smaller commercial spaces.
3- For the large spaces, I see the smaller neighborhood supermarkets closing when the larger supermarket formats came in. The store stayed empty for a long while till the large pharmacies, such as CVS came in. I seen some empty for two or more years.
4- As to smaller spaces rented to laundromats, dry cleaners, nail salons, I see too much competition in some of these retail operations. I looked at a commercial strip in a neighborhood where there are stores going up an avenue for a good mile. There was a landromat, deli, dry cleaner, almost on every corner.
I watched as established dry cleaners suddenly have two new competitors open up. Now, every one has trouble paying the rent.
Indeed, I only pay $11.00 for a haircut and wash now, compared to $15.00 five or so years ago, as three more hair salons opened up in the neighborhood. Would this have any effect on rents??
3- Commercial tenants are trouble free if they behave properly, just the same as residential. For my dad’s commercial stores, they are responsible for cleaning the sidewalks, and plumbing etc. But the city still issue tickets to the owner if sidewalks are not cleaned, and my dad had to follow up the tenants to get re-imbursed.
One tenant, a travel agency, cannot get its help to sweep the sidewalks, so they look at paying tickets as the cost of cleanup. Needless to say, my dad got a little tired of the tickets, followup etc. My dad gets the dunning notices when the tickets are not paid.
My conclusions:
All in all, commercial is a lot less work than residential, mainly because tenancies last 5, 10, 15 years. But vacancies are longer.
With the proper lease arrangements, tenants handle the maintenance. But be ready to step in if the tenant falters.
Cap rates are higher, its like 7% to 8% here in NYC, as compared to 5 or so percent I calculate on residential.
But in my book, the cap rate is only higher since the risks are higher.
As for me, I am looking for a good commercial opportunity here myself, having refinanced cash out of my residential properties.
Frank Chin